Canada’s housing market explodes, will the United States be next to feel the pain.
For those who have been following Canada’s housing market know that this has been a hot topic. Home Capital, a little known lender recently made headlines as clients withdrew hundreds of millions in savings in a matter of days.
What is Home Capital?
Home Capital is the parent company of a number of federally regulated financial institutions including Home Trust, Home Bank and Oaken Financial. Based in Canada they compete in six provinces with big banks, credit unions and other companies for business, they target “segments of the Canadian financial services marketplace that are not the focus of the major financial institutions,” Home Capital says on its website.
While Home Capital offers a full complement of financial services including credit cards, GICs and savings accounts. They are well known and made most of its money selling uninsured mortgages to clients who the big banks won’t dare touch. Either their clients had poor credit histories or were entrepreneurs who had volatile income.
Why Does Home Capital Matter?
Home Capital’s problems began last week when the Ontario Securities Commission alleged that several company executives broke securities laws and misled shareholders in their handling of a scandal involving falsified documentation for a bunch of mortgages almost two years ago.
Back in 2015, the company stated that they let 45 mortgage brokers grow for fudging their numbers so their clients get can get bigger loans, regardless of the clients ability to pay. As result, the companies financials continued to grow. Home Capital has stated that none of the borrowers had problems paying their loans as the company as the companies financed back up their claim.
Nevertheless, the company’s stock was decimated last week as the OSC’s allegations sparked fears the company may have loaned out too much money to homebuyers who may not be able to pay them back in an Canada’s over inflated housing market.
Steve Saretsky weighs in on what exactly happened:
Home Capital’s shares plunged 65 per cent on Wednesday amid those fears, and as word spread that savers were withdrawing money at an alarming rate. “They rebounded a little on Thursday after the company secured a $2-billion line of credit from the Healthcare of Ontario Pension Plan, but a cloud of uncertainty remains, especially since that lifeline comes with a catch: an interest rate of more than 22 per cent on the first $1 billion” according to a recent report.
As more people redeem or withdraw their funds due to lack of confidence the company could collapse and have a ripple effect through the entire Canadian financial mortgage industry as well as the overall economy.
“If investors pull money out of that, that will exacerbate the problem even further,” said Cynthia Holmes, a professor of real estate management at Ryerson University in Toronto. “It’s a very serious problem when their deposits dry up,” because they have to offer higher and higher returns in a vicious circle to attract new investment.
What can happen next is that the company might have to fold or close due to not being able to satisfy it’s financial obligations. It’s good news that they did secure a line of credit, but if that runs out or if there any regulatory issues, the company could quickly collapse.
This matters as the Canadian covers $100,000 of funds in your account, anything above that is at risk. Therefore, the bigger money clients will either withdraw or run the risk of losing any funds greater than that amount.
If the clients who received these questionable mortgages continue to pay, there should not be an issue in the long-term. However, if they don’t you can see what happened in the USA from 2007-2009 happen in Canada. It all starts with one smaller-mid sized company and then you will see a ripple effect.
When Canada Sneezes, the US Catches a Cold.
In both Canada and The United States debt is cheap. Interest rates are the lowest in decades, therefore, both countries are seeing people increase their personal debt. The belief is that debt is inexpensive, they will have the ability to pay off this debt in the near future. Further, many people are taking out mortgages to take advantage of the low interest rates or line of credit against their home equity and using it for other things than improving their homes. This is a recipe for disaster and could crash Canada’s housing market in the near term.
Canada’s current economic economic situation is scary as we experienced an economic nightmare roughly ten years ago. In my opinion, the US economy has still yet to fully recover. But what does what’s happening in Canada, have to do with the U.S.? “It turns out our financial systems are more intertwined than you’d think. In the wake of the 2008 crash, the strength of Canada’s economy helped to boost our own, mitigating the effects of our recession. Our largest export market; we’re reliant on the stability of our neighbors to the north, and their continued financial success, to this day”, according to Goldco.com.
Since the current US economy is far from stable, a potential Canadian crash As we previously mentioned, the U.S. economy is already on precarious footing at the moment, with another crash potentially just on the horizon. Our own housing bubble is nearing its bursting point, and the markets are poised to plummet in both countries.
If Canada’s housing bubble bursts before ours does, it will most likely trigger a domino effect that sends both countries in a downward spiral. As the housing market suffers, the financial markets will soon follow. Once they get hit, then the borrowing stops and the US economy can collapse.
What Can You Do To Protect Yourself?
Make sure that the you have less than $250,000 with any given bank as well as make sure your bank or credit union is covered under FDIC insurance. Ironically it is a great time to purchase rent producing property or land. But only do so if you are on stable footing and have savings to back it hip in case of a financial decline. Bonds that are backed by the government are always a great idea if your risk averse in light of recent events. Lastly, Gold and silver, however, remain safe havens.
New Theory previously discussed “Are Hedge Funds Doomed?, as we’re predicting a much smaller Hedge Fund market then what we are currently seeing. We also predict the housing collapse in Canada. I personally see a 20% chance of another housing collapse in the US, simply because we already beat-up and things may not be able get much worse. Either way, keep a close eye on these developments as they unfold as you may need to hit the bug out shelter with your canned goods and ammunition if we have yet another US housing collapse.